Costa Rica Tax Laws for Expats, Dummies or Both
November 11th, 2008 | by admin |After several years of working on and off in Central America, I have seen just about every possible way to do business: effectively, legally, and otherwise. After my first year in a stable position in Costa Rica, I successfully completed my tax forms and paid my part with limited hiccups. With all the questions surrounding the tax system and how to get them filed on time and without a huge investment, I decided to address these doubts with my accountant, Rafael Martinez-Ortiz, President of RMO Financial & Accounting Services.
Though still a tad confusing, I successfully organized his responses about paying taxes in Costa Rica on a case by case scenario for other newbies or those hoping to skirt the system upon arrival. My conclusion: it’s so much cheaper than in the states, it is easier and smarter to just do it rather than live with a fear of ramifications. Registering with the Hacienda and the Costa Rican Social Security organization is also a big help for any of you considering applying for residency in the future as it shows you are financially responsible and abide by loca law.
Case 1: You are a freelancer offering “professional services” i.e. writing, consulting, etc. To begin to work in Costa Rica, you must register yourself at La Hacienda (located 4 blocks south of the Pizza Hut on Paseo Colon) in the income tax office. Here you will fill out a D-140 form asking what money generating activity you will be involved in and basic contact information. You will be assigned a tax ID number and given a receipt to pick up official facturas (invoices) that must be filled out and given to your employer every time you are paid. These cost about $20 and you will get enough for years to come.
IMPORTANT: Until the end of the fiscal year (begins Oct. 1 and ends Sept. 30), you should be saving ALL facturas that you write as well as all receipts for work-related expenses. Actually just save all receipts and let your accountant determine what counts, you’d be surprised what is considered work-related! The receipts will then be deducted from your income to determine which tax bracket you fall into. I was unaware of this, causing my net income to appear much higher than it was in reality, and therefore paid more taxes. The current tax bracket for next year is as such (the profit total comes from your income minus your business-related expenses):
Profiting below $4,725: no taxes (*you still must file them, it will just result in no payment)
Between $4,726 and $7,050: pay 10% of all earnings over that sum
Between $7,051 and $11,770: pay 15%
Between $11,771 and $23,585: pay 20%
Over $23,585: pay 25%
*These are estimated conversions
For example, if you earned $15,000 this year, and spent $8,000, you would owe $227.50 in taxes.
Tax deductible receipts encompass a wide variety of topics: transportation (international and domestic flights, bus receipts, car rentals), office supplies (computers, pencils, etc.), work clothing, entertainment expenses (this can be for groceries, eating out, anything that you may have used to entertain clients) as well as your rent (this assumes you work out of your home, even if you do not).
Professional Services employees must fill out the D-101 and D-151 forms that can be purchased for less than $1 at any Banco Popular. D-101 will list your total income, expenses divided by category, net income and total owed. You need three copies of this, two to turn into most any bank (BCR, Promerica, etc.) where you will pay the taxes and receive an official stamp and keep one copy for yourself. This must be done by Dec. 15.
The D-151 form must be turned into the Hacienda by Nov. 30, which they will check to be sure that the expenses and earnings match up with what companies and individuals you worked with claim in their taxes
NOTE: After paying your first fiscal year’s taxes, you will then have to make advanced quarterly tax payments, which total about 25% of the payment you made the year before. These are paid March, June and September.
While it is easy to acquire the documents necessary to claim your taxes, the tax forms come with zero instruction and can be very confusing especially if you do not speak Spanish. Accountant (“contador”) prices may vary between $40 to $100 for individual income taxes, and higher for businesses. I was charged $35 per hour by Martinez, totaling $45, and they came to pick up all my documents and dropped off the final with no extra charge. See contact information below if you are interested in contracting his services or have any further questions!
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Case 2: You are doing a Costa Rica internship. Interns should sign a contract with their employer stating that they are interns and their salary is just a cost of living stipend. As this infers that you will not have any profits, you will not be required to pay anything for your taxes. Ask your employer if they require that you register for the Hacienda, because if you do not, they cannot count your salary as a company expense. Either way, you would only pay the $20 for facturas. If you won’t be here through the tax declaration date, your company should take any tax declaration responsibilities upon themselves.
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Case 3: You are a “salaried professional”. This means you have a set salary established by your place of employment. By law, your employer must register you with the Costa Rican “caja” (CCSS) or the government’s Social Security organization. As such, you will not have to register with the Hacienda because your taxes are taken out automatically each month.
To get set up, you will have to get your Orden Patronal from the CCSS. Payment must be made through a state bank, so you will probably have to open a Banco Nacional bank account and give your account number to your employer for direct salary deposits every quincena (every 15 days). The tax bracket for salaried professionals is slightly different as the assumption is that all work related expenses are covered by your company. Taxes are automatically deducted each month along with your payment to the Caja for health insurance. The other benefit of the Caja system beyond not having to declare taxes is the yearly “aguinaldo” or Christmas bonus which roughly totals 1/12 of your salary for each month you have worked with the company that year. So if you complete a full year, you should get an extra month’s salary in December.
The tax bracket for salaried professionals is as follows:
Salary below $1,065/month: exempt
Salary between $1,066 and $1,600/month: 10% tax of earnings over $1,066
Salary over $1,600/month: 15% taxes
To set up health insurance under the Caja system, you must take your Orden Patronal, a letter from your company stating your position, your ID and proof of where you live (an electric or water bill) to the Health Clinic closest to where you live that is on the health insurance system. You will have to bring your ID, Orden Patronal and the little card that they give you to make any doctor appointments in the future.
The Caja deducts 8% of your salary in monthly payments for your insurance and pension, but part of this is returned to you in the Christmas bonus
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Case 4: You own a Costa Rican corporation. As long as you are considered a small Costa Rica business, your company may be registered in the Hacienda through the simple regime document. Unlike individuals, your tax rate will be based on your gross income, but applied to your net income. (Your profits before deducting expenses determine the rate you pay, whereas the rate is applied to the result of deducting your expenses from that income)
Gross profits up to $70,700: 10%
Gross profits up to $142,000: 20%
Gross profits over $142,000: 30%
This is also filed by using the D-101 income tax form. If your company involves the sale of a certain product, you must also file the D-104. This is due 15th of the month after you close your fiscal year. For most companies, that is Nov. 15th. You must also pay an Education and Culture tax called the timbre educacion y cultura every March 31st based on the total income of your company, totaling up to $18 a year, as well as a minimal municipal tax that varies based on each municipality.
